Comptroller Kevin Lembo today projected that the state is on track to end the
fiscal year with a $197.7-million deficit, but said there are factors that
demand watch, including April receipts and significant growth in Wall Street
bonuses over the last year.

In a letter to Gov. Dannel P. Malloy, Lembo said that his deficit projection
is once again slightly higher than the Office of Policy and Management’s (OPM)
projection due to a larger anticipated deficiency (approximately $35 million) in
the state’s Adjudicated Claims account – the account responsible for paying the
ongoing SEBAC v. Rowland claims, related fees and other state settlements.

The end of April will be a crucial time in understanding the state’s outlook,
after tax receipts are collected and the next consensus revenue forecast is
projected (April 30).

In the meantime, Lembo said that it’s still premature to classify growth in
the personal income tax above budgeted expectations as an actual trend – but he
said it may be related to a surge in Wall Street bonuses, which have
historically propelled Connecticut’s budget performance in the past.

“While I have not yet incorporated it into my projections, one development is
providing reason for cautious optimism on the revenue front,” Lembo said.
“Growth in the withholding portion of the Personal Income Tax is trending above
budget expectations year-to-date. January and February withholding receipts were
particularly strong, a time period that coincides with the traditional season
when bonuses are awarded. In part this may be due to a successful year for Wall
Street and the stock market, which benefits Connecticut residents who work in
the financial services industry.”

Lembo highlighted a recent annual release by the New York State Comptroller
that revealed bonuses for the securities industry were up 17 percent over last
year, with a total bonus pool of $31.4 billion and an average bonus of $184,220.

“Of course, broader and more sustained growth is needed to stabilize
Connecticut’s budgetary position in light of the fiscal challenges facing our
state,” Lembo said.

While the effects of Wall Street bonuses are worth watching, Lembo said that
Connecticut continues to struggle in certain areas, including underperformance
in the corporation tax and sales and use tax. Lembo said that these categories
are offsetting potential gains in withholding and bear close scrutiny as the
year progresses. The current revenue forecast projects a significant increase in
estimated and final income tax payments – however, most of that growth is likely
attributable to one-time events as opposed to a trend in growth.

Despite significant increases in a number of fixed cost areas, General Fund
expenditures through February are running a modest 0.4 percent higher than last
year’s spending to this point. A combination of active budget management and
legislative action will be needed to close the deficit prior to fiscal year-end.

“Ultimately, Connecticut’s overall budget results are largely dependent upon
the performance of the national and state economies,” Lembo said.

Lembo pointed to the latest economic indicators from federal and state
Departments of Labor and other sources that show:

• Through the first eight months of FY 2018, withholding receipts were up a
nominal 6.6 % compared with last fiscal year. However, this growth is somewhat
overstated due to revenue accruals related to FY 2017 year-end adjustments and
differences in the number of collection days. Accounting for this activity, the
FY 2018 year-to-date growth in withholding collections is closer to four
percent.

• As noted below, job growth has shown improvement in recent months, but
overall wage growth still appears modest. Therefore, some of the increase in
withholding receipts likely reflects a strong bonus season after the close of
calendar 2017. In part, this may be due to a successful year for Wall Street and
the stock market, which benefits Connecticut residents who work in the financial
services industry. Last week, the New York State Comptroller reported that
bonuses for the securities industry were up 17% over last year, with a total
bonus pool of $31.4 billion and an average bonus of $184,220.
• On March 22nd, Connecticut DOL reported the preliminary Connecticut nonfarm
job estimates for February 2018 from the business payroll survey administered by
the US Bureau of Labor Statistics (BLS). DOL’s Labor Situation report showed the
state gained 2,600 net jobs (0.2%) in February, to a level of 1,692,000,
seasonally adjusted. In addition, January’s originally-released job gain of
3,400 was revised up by 400 by the BLS to a gain of 3,800 jobs for the month.
February represented the fourth consecutive month of job growth for Connecticut.
• In terms of job growth for February, bright spots included construction with
1,500 net new jobs, leisure & hospitality with an increase of 1,100 net jobs,
followed by financial activities, which added 700 net new jobs. On the downside,
professional & business services lost 1,000 jobs in February.
• Over the year, DOL reported that nonagricultural employment in the state grew
by 8,100 jobs on a seasonally-adjusted basis.

• Connecticut has now recovered 82.1% (97,800 payroll job additions) of the
119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). The
job recovery is into its 96th month and the state needs an additional 21,300
jobs to reach an overall employment expansion. DOL notes that private sector job
growth has outpaced that of the government sector. Connecticut’s private sector
has regained 102.7% (114,700) of private sector jobs lost in the same downturn.
• Connecticut's unemployment rate is estimated at 4.6 percent in February, up
one-tenth of a percentage point from January 2018 and down three-tenths of point
from a year ago when it was 4.9 %. Nationally, the unemployment rate was 4.1% in
February 2018, unchanged from January. The chart below shows a comparison of the
Connecticut and U.S. unemployment rates for the past three calendar years.

• DOL reports that February 2018 seasonally adjusted average weekly initial
unemployment claims for first-time filers in Connecticut grew by 320 claimants
(+9.4%) to 3,279 from January 2018, and were higher by 308 claims (+9.0%) from
the February 2017 level of 3,421.

• Among the major job sectors listed below, six experienced gains and four
experienced losses in February 2018 versus February 2017 levels.

Population
• On Dec. 20, the U.S. Bureau of the Census released its population estimates
for July 1, 2017. After three years of declines, there was essentially no change
in Connecticut’s population between 2016 and 2017. The state’s population now
stands at 3,588,184, which represented growth of 0.01% from the prior year’s
estimate. The Census Bureau reports Connecticut ranks 29th in the nation in
terms of population. However, since 2010, Connecticut’s population grew only
0.4%, which ranked 48th for the period among U.S. states.

• February 2018 average hourly earnings at $31.43, not seasonally adjusted, were
up $0.13, or 0.4%, from the February 2017 estimate. The resultant average
private sector weekly pay amounted to $1,059.19, up $26.29, or 2.6% higher than
a year ago.
• The 12-month percent change in the Consumer Price Index for All Urban
Consumers (CPI-U, U.S. City Average, not seasonally adjusted) in February 2018
was 2.2%.
• On March 22, the Bureau of Economic Analysis reported that Connecticut’s
personal income grew by 1.5% between 2016 and 2017. This ranked Connecticut 44th
nationally in 2017 income growth. However, BEA also showed the pace of
Connecticut personal income growth accelerated at a rate of 1.1% between the
third and fourth quarters of 2017. Based on these results, Connecticut ranked
26th nationally in personal income growth, equal to the national average for the
quarter.

• On a positive note, Connecticut remains a wealthy state overall.
Preliminary BEA estimates for 2017 rank Connecticut first in the nation in
annual per capita personal income at $70,121, which represents 139 % of the
national average.

• In its March 7 release, Berkshire Hathaway HomeServices reported mixed results
for the Connecticut housing market for February 2018 compared with February
2017. Sales of single family homes declined 5.88 percent. However, the median
sale price rose 7.11 percent.
• New listings grew by 4.70 percent in Connecticut and the median list price
rose 6.59 percent to $249,900.
• Average days on the market increased 12.77 percent in February 2018 compared
to the same month in the previous year (106 days on average, up from 94 days).
Finally, the list to sell price rose slightly to 96.5 percent, compared with
96.1 percent a year ago. The table below contains more detailed data for the
Connecticut housing market.
The following chart from Berkshire Hathaway HomeServices shows the total number
of Connecticut single family homes for sale in February 2018 distributed by list
price:

Stock Market

• After a steady rise and strong gains throughout calendar 2017, the stock
market indices reached their peak in late January 2018. Since then, there has
been significant turbulence in the markets throughout February and March 2018.
Some analysts noted the initial stock sell-off occurred after a strong jobs
report released on Feb. 2 by the Bureau of Labor Statistics. Total U.S. nonfarm
payroll employment increased by 200,000 in January and average hourly earnings
rose a strong 2.9 percent over January 2017. The better-than-expected wage
growth sparked fears of inflation among investors, with worries about the
Federal Reserve raising interest rates more aggressively than anticipated.
• More recently, investors have been nervous about the possibility of an
escalating trade war as the Trump administration announced tariffs on products
like steel and aluminum and threated to impose trade sanctions on China.
• Recent swings in the stock market are illustrated on the two charts that
follow:

DOW

NASDAQ

• The performance of the stock market has a significant impact on the State
of Connecticut revenues. Estimated and final income tax payments typically
account for approximately 35 to 40% of total state income tax receipts, but can
be an extremely volatile revenue source. Both estimated and final payments had
negative growth rates in Fiscal Years 2016 and 2017.
• However, due to a combination of one-time events, estimated payment
collections increased substantially in December and January, nearly doubling the
year-to-date total from the prior year. For example, through February 2018
estimated payments totaled $2.18 billion versus $1.1 billion through February
2017. Year-to-date final payments through February grew by $127 million or 47.5
percent over the same period a year ago.

• Two primary factors contributed to the significant increase in estimated
payments year-to-date in FY 2018. The first is related to the recent Federal tax
change that placed limits on the amount of state and local taxes (SALT) that can
be deducted for Federal tax purposes. Based on this new provision, many
Connecticut taxpayers made payments prior to the end of calendar 2017 to ensure
these estimated income tax payments would be deductible for their Federal 2017
returns. Therefore, these payments probably represent a shift from collections
that would likely have occurred in April 2018.
• The second factor was related to an October 2008 Federal law that eliminated a
common mechanism used by hedge fund managers that enabled them to defer receipt
of incentive or management fees earned by charging them to an offshore fund.
Under the new rules (Internal Revenue Code Section 475A) hedge fund managers had
to recognize these profits, earned prior to January 1, 2009, as income before
December 31, 2017. Therefore, a significant amount of the estimated payments
collected were related to hedge fund managers bringing these profits back to the
United States from overseas. As such, they should be considered to be a one-time
revenue source.
• Due to the new revenue volatility adjustment contained in Section 704 of
Public Act 17-2, June Special Session, any estimated and final payment
collections amount above $3.15 billion will be transferred to the Budget Reserve
Fund (BRF). Based on this new statutory provision, if current revenue forecast
totals are realized, $664.9 million will be deposited in the BRF, bringing the
balance to $877.8 million, approximately 4.7 percent of General Fund
expenditures.

Consumer Spending

• Consumer spending is the main engine of the U.S. economy, accounting for
more than two-thirds of total economic output.
• U.S. retail sales fell in February 2018, marking the third straight month of
declines. The Commerce Department reported that advance retail sales decreased
0.1 percent last month. January data was revised to show sales dipping 0.1
percent instead of falling 0.3 percent as previously reported. Analysts note
this may be a sign of slowing economic growth in the first quarter of 2018.

• In February, auto sales fell 0.9 percent after a similar drop in January.
Receipts at service stations declined 1.2 percent, reflecting lower gasoline
prices. There were also declines in sales at furniture stores, health and
personal care stores and electronics and appliance stores.
• On the positive side, sales at building material stores increased 1.9 percent
last month. In addition, receipts at clothing stores rose 0.4 percent and sales
at online retailers grew 1.0 percent. Sales at restaurants and bars increased
0.2 percent, while receipts at sporting goods and hobby stores gained 2.2
percent from the previous month.
• In comparison to a year ago, the Commerce Department reported that retail
sales were 4.2 percent above February 2017 levels.

Consumer Debt and Savings Rates

• According to the Federal Reserve Bank of New York, aggregate household debt
balances rose to another new peak in the fourth quarter of 2017. Household debt
has now grown in 14 consecutive quarters. As of December 31, 2017, overall debt
– including mortgages, auto loans and student loans – hit a record $13.15
trillion. This represented a $193 billion (1.5%) increase from the third quarter
of 2017.
• This report marks the fifth consecutive year of positive annual household debt
growth. There were increases in mortgage (+1.6%), student (+1.5%), auto (+0.7%),
and credit card debt (+3.2%) and another modest decline in home equity line of
credit (HELOC) balances (decreasing by 0.9%).

• In its March 29 release, the Bureau of Economic Analysis (BEA) reported the
personal-saving rate increased to 3.4 percent in February, up from 3.2 percent
in January. However, this savings level is just over half of the recent peak of
6.3% in October 2015 and remains close to prerecession lows.
• Higher debt levels and lower savings point to U.S. wage gains that are not
keeping up with consumers' needs and desires to spend. This also signals a more
uncertain outlook for future consumer spending gains. One explanation for this
trend is the so-called wealth effect. Consumers may feel richer because the
stock market is rising and home values have increased in recent years.
• The graph below provides a long-term view of the U.S. savings rate from the
beginning of 1959 through January 2018. As can be seen, there is a pronounced
downward trend over the period. It should be noted that the U.S. Personal Saving
Rate does not include capital gains from the sale of land or financial assets in
its estimate of personal income. This effectively excludes capital gains – an
important source of income for some.

• Despite the overall improvement in the nation’s economy, income inequality
continues to widen as wage growth remains modest. A number of economists see the
dramatic decline in the personal savings rate as a red flag as consumers borrow
more to fuel spending. This will leave little margin for error in case of a
downturn, especially for families who are living from paycheck to paycheck.

Consumer Confidence

• The U.S. consumer confidence index (CCI), published by the Conference
Board, is an indicator designed to measure consumer confidence. This is defined
as the degree of optimism on the state of the economy that consumers are
expressing through their activities of savings and spending.
• The Conference Board reported that consumers' assessment of current economic
conditions declined in March 2018, breaking a streak of two months of gains. The
Index now stands at 127.7, down from 130.8 in January. The March rating came in
below expectations based on a Reuters survey of economists.
• The primary reason for the decline related to business conditions. The board
noted consumers’ short-term expectations also declined, including their outlook
for the stock market. However, overall expectations remain favorable by
historical standards, including views of the labor market.

Business and Economic Growth
• According to a March 28 release from the Bureau of Economic Analysis, U.S.
Real Gross Domestic Product increased at an annual rate of 2.9 percent in the
fourth quarter of 2017. In the third quarter, real GDP increased 3.2 percent.
For the year, the economy grew at 2.3 percent in 2017, up from the 1.5 percent
growth rate experienced in 2016.
• The increase in real GDP in the fourth quarter reflected positive
contributions from personal consumption expenditures (PCE), nonresidential fixed
investment, exports, residential fixed investment, state and local government
spending, and federal government spending that were partly offset by a negative
contribution from private inventory investment. Imports, which subtract from GDP
growth, increased at their fastest quarterly rate in more than seven years.
• BEA also reported that after-tax corporate profits increased at a 1.7 percent
rate in the fourth quarter after rising at a 5.7 percent pace in the third
quarter.
• In a January 24th report, the Bureau of Economic Analysis released Real Gross
Domestic Product (GDP) results by state for the third quarter of 2017.
Connecticut experienced a seasonally adjusted annual growth rate of 3.9 percent,
which ranked 8th in the nation overall. This was a significant improvement from
the second quarter of 2017, when Connecticut ranked 44th in the nation with
annualized growth of 1.9 percent. The sectors that contributed most to
Connecticut’s strong third quarter performance were finance and insurance,
durable goods manufacturing, and information services.

• Updated data for Gross Domestic Product by State is scheduled to be issued
on May 4, 2018. That release will cover fourth quarter GDP and preliminary
annual results for 2017.
• According to a March 23 report by the U.S. Department of Commerce, new orders
for durable goods increased $7.4 billion in February 2018 or 3.1 percent to
$247.7 billion. This increase, the third in the last four months, followed a 3.5
percent decrease in January.

• Transportation equipment led the increase, growing $5.5 billion or 7.1
percent to $83.5 billion. Excluding transportation, new orders increased 1.2
percent. Orders for non-defense capital goods excluding aircraft (a proxy for
business spending) increased 1.8 percent last month after declining 0.4 percent
in January.
• The March 22 Markit Flash Purchasing Manager’s Index (PMI) reported that U.S.
private sector companies experienced another strong increase in output, together
with a solid growth in payroll in March.
• The March index of 54.3 was down from 55.8 in the previous month. However, any
reading above 50 represents growth. The latest upturn in business activity
driven by solid rises in both manufacturing production and service sector
output.